Frontier Group Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Frontier is a Denver-based ultra-low-cost airline serving about 90 airports in the United States and the Americas. Results are unaudited.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Operating revenue | $883 million | $906 million | $2.698 billion | $2.420 billion |
| Operating income (loss) | $(54) million | $56 million | Break-even | $(90) million |
| Net income (loss) | $(32) million | $31 million | $26 million | $(77) million |
| Diluted EPS | $(0.14) | $0.13 | $0.12 | $(0.36) |
| Operating expense / CASM | $937 million / 9.66¢ | $850 million / 10.57¢ | $2.698 billion / 9.70¢ | $2.510 billion / 10.88¢ |
Q3 operating margin was approximately (6.1)%, versus 6.2% a year earlier; the nine-month operating result was approximately break-even. Q3 RASM fell 19% to 9.10¢ as revenue per passenger declined 15% and load factor fell 2.5 percentage points to 80.0%. Capacity, measured by available seat miles, rose 21%. For the nine months, revenue increased 11% on 21% capacity growth, while RASM declined 8%; load factor improved 2.2 points to 82.6%.
Q3 passenger revenue declined 2%, despite higher ancillary revenue, as fare revenue per passenger fell 32%. For the nine-month period, passenger revenue increased 12%, with non-fare passenger revenue growth partly offsetting lower fares. Fuel expense fell 5% in Q3 and 3% year to date, primarily due to lower fuel prices. Salaries and benefits, station operations, aircraft rent, and maintenance costs increased with fleet and operating growth. Management-reported non-GAAP adjusted CASM excluding fuel fell 3% in Q3 and 5% year to date; these measures are not GAAP and should be considered alongside reported results.
Cash, debt and liquidity
Cash and cash equivalents were $640 million at September 30, 2023, down from $761 million at December 31, 2022; the company reported total available liquidity of $640 million. For the first nine months, operating cash flow was $(207) million, investing cash flow $(91) million, and financing cash flow $177 million, producing a $121 million net cash decrease. Financing inflows included $124 million of sale-leaseback proceeds and $141 million of debt proceeds.
Debt was $490 million before $4 million of debt costs and discounts (reported debt, net, approximately $486 million); $266 million was classified as current. Operating lease liabilities totaled $2.852 billion. The company reported compliance with its debt and other covenants. Total debt principal payments scheduled for 2024 were $238 million. Management said it expects to meet cash needs for the next 12 months using available cash, the pre-delivery payment facility and operating cash flows.
Outlook, risks and notable items
- The filing provides no specific earnings or revenue guidance. Management cited continued leisure demand through most of the first nine months, partly offset by lower domestic fares.
- Aircraft delivery delays had exceeded several months. Frontier disclosed firm commitments for 214 A320neo-family aircraft and 16 engines, with $12.693 billion of aircraft and engine purchase obligations through the stated delivery schedule. It also reported $3.641 billion of undiscounted operating lease obligations.
- Pratt & Whitney expanded inspections of PW1100 GTF engines to include engines in Frontier’s fleet. Inspections are expected to begin in the second half of 2024; operational and cost impacts were unknown and could affect aircraft deliveries.
- Frontier depends on Airbus for its aircraft and on CFM International and Pratt & Whitney for engines. The filing identifies supplier delays, technical issues and potential fleet disruptions as material risks.
- Sale-leaseback gains were $40 million in Q3 and $97 million year to date. The company also recorded an $18 million year-to-date aircraft-rent benefit from extending certain leases and reversing previously accrued variable return costs.
- Approximately 86% of employees were represented by unions. Pilot and flight-attendant agreements had amendable dates in January and May 2024, respectively; negotiations for material specialists were ongoing.
- Routine litigation and regulatory matters were disclosed; management did not expect them to have a material adverse effect, while noting outcomes can be uncertain. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether lower fares and Q3 load-factor weakness persist, and whether capacity growth translates into improved unit revenue and profitability.
- Cash burn, available liquidity and ability to meet near-term debt payments, aircraft deposits and other commitments.
- Timing and operational effects of Airbus delivery delays and the PW1100 GTF inspection program.
- Whether labor negotiations, fleet growth and higher maintenance and staffing costs affect expenses or operations.
- The sustainability of earnings and cash generation excluding sale-leaseback gains and other unusual or non-GAAP adjustments.